Recently it has become increasingly more important that organisations develop systems of performance measurement which do not only reflect the complexity of the business environment but also monitor their strategic response to this complexity.
Effective performance management is essential and one of the main issues that management have to consider is:
- Setting performance standards and targets.
- The linking of rewards to performances.
- Considering the benefits and problems of performance measures.
It is vital that management ensure that performance measures target areas, within the business, where success is a critical factor.
In an attempt to establish the link between performance and strategy, it is vital that management ensures that they identify the performance measures target areas within a business.
Establishing a performance management system
The start point is usually an organisation’s underlying mission, vision and strategic direction, in general the approach helps:
- Identify key objectives – known as Critical Success Factors (CSFs)
- Establish measures for CSFs – measures are known as Key Performance Indicators (KPIs), these are driven by CSFs
- Set target KPIs
- Establish initiatives and ways to achieve the above
- Devise methods of capturing the data and processing the information
- Monitor the above via management reporting
The above can be seen as a cascading effect, i.e. CSFs determine KPIs, we then set a target and then consider ways to achieve the target KPI; the KPIs are then calculated, monitored and reported to the board and operational managers. If the target KPIs are not being met then appropriate action can be taken.
Some sense of prioritisation has to occur otherwise we will merely end up calculating and monitoring a list of KPIs that have no cohesive linkage and can cause us to lose sight of our main strategic purpose. This methodology, if developed and implemented effectively replaces the conventional budgetary reporting system where the focus is more on cost control – important but not the sole determinant of achieving our ultimate mission.